Among many other changes we’ve highlighted in recent communications, the Tax Cuts and Jobs Act of 2017 changed the rules regarding home mortgage interest tax deductions for tax years 2018-2025. Many CCM clients have had questions about this so we wanted to share some key factors that will determine the deductibility of interest paid on a mortgage loan.

1. The mortgage must qualify as acquisition debt in order for the interest to be deductible as home mortgage interest. Acquisition debt is debt that is secured by the taxpayer’s principal or second home, and was incurred in acquiring, constructing, or substantially improving the taxpayer’s principal or second home.
2. The amount of acquisition debt incurred after December 14, 2017, that qualifies for the home mortgage interest deduction is limited to $750,000. For example, if you were to buy a $1,500,000 house with a $1,200,000 mortgage, only the interest that you pay on the first $750,000 in debt is deductible. The interest paid on a mortgage balance in excess of $750,000 is considered personal interest and is not deductible. For acquisition debt incurred prior to December 15, 2017, the applicable limit is $1,000,000.The debt limit is applied on a combined basis to the total acquisition debt on a primary or second home.
3. The interest paid on new or existing home equity debt is not tax deductible. Home equity debt is debt that is secured by the taxpayer’s principal or second home and was not incurred in acquiring, constructing, or substantially improving the taxpayer’s principal or second home. It is important to note that acquisition debt and home equity debt are terms defined by the Internal Revenue Code. The terminology used by the bank or mortgage company does not impact whether debt is acquisition debt or home equity debt. For example, a home equity line of credit used to substantially improve a taxpayer’s home is acquisition debt and is not home equity debt. On the other hand, a first position mortgage used to pay off credit card debt is home equity debt and not acquisition debt.
4. Interest on a refinanced mortgage is deductible as home mortgage interest subject to the rules above. The applicable acquisition debt limit is based on the when old mortgage was incurred. For example, if the old mortgage was incurred prior to December 15, 2017, the refinanced mortgage is subject to a $1,000,000 limit. The amount of the refinanced debt that qualifies for the home mortgage interest deduction can’t exceed the amount of the old mortgage balance prior to the refinance. In other words, a cash out refinance would not qualify.
5.  Home equity debt is not deductible as home mortgage interest, but may be deductible under a separate section of the Internal Revenue Code based upon how the proceeds were used. Some examples of this include the following:
   • If home equity debt was used to invest in stocks, the interest would be deductible as investment interest.
   • If the home equity debt was used to fund an existing business, the interest paid would be deductible as business interest expense.
   • If the home equity debt was used to purchase a rental property, the interest paid would be deductible against the rental income.

Changes in the home mortgage interest deduction significantly impact the analysis of many important financial planning decisions. We are assessing how these changes may affect your integrated wealth plan. Please contact us if you have any related questions.